In a judgment which is destined to become the leading case on the topic, Coulson J restated the law on the relationship between adjudication enforcement and insolvency and held that the existence of a winding up petition is not a defence to summary judgment.

The issue arose in this way: Alexander & Law (‘A&L’) had traded successfully for twenty years business as a building contractor. In May 2011 it entered into a contract with Coveside (21BPR) Ltd, a property developer incorporated, as its names suggests for the specific purpose of developing 21 Buckingham Palace Road. The contract was later varied to include works on two other properties. Coveside terminated the contract in March 2013. By that stage A&L contended that Coveside had wrongfully withheld monies under a number of claims and that its cashflow had been affected to such an extent that it was unable to continue trading. In June 2013 A & L referred to adjudication the question of the validity of the termination and the withholding of some of the monies. The adjudicator decided that the termination was a wrongful repudiatory breach of contract which had been accepted by A & L. He further decided that the Defendant should pay a sum of £200k odd in respect of an amount certified but not paid, retention monies and interest. Coveside failed to make payment in accordance with the adjudicator’s decision. A & L therefore issued proceedings seeking to enforce the decision by way of summary judgment.

By that stage a winding up petition had been issued against A&L by a third party supported by a number of apparent creditors including Coveside. Although many of the debts, including that of Coveside, were disputed the petition was on its face valid. Coveside argued that the existence of the winding up petition was an absolute defence to summary judgment.

A&L argued that the court should maintain a clear line as to what matters constitute a defence to summary judgment and what matters go to a cross application for a stay. It argued that the existence of a winding up petition should not be a defence to summary judgment: only actual insolvency should be a defence to summary judgment. The existence of a winding up petition does not of itself establish insolvency: that will be a matter for the court hearing the petition. Nor should the existence of a winding up petition enable a defendant to invite the court to consider whether the claimant was in fact insolvent on the facts of the case. The TCC court should not pre-empt the decision of the Companies’ Court by forming its own view on the likely outcome of the petition. To do so would also in effect bypass the Vago test as actual insolvency would be a defence and not the first stage of a test seeking to hold the balance between the parties. If summary judgment could be resisted it would be irrelevant whether the defendant had caused the insolvency.

This was the first case since the short, unreported decision of HHJ Seymour QC in Harwood Construction Ltd v Lantrode Ltd, on 24 November 2000 that the TCC was invited to rule on the point.

Coulson J agreed with A&L, approving and expanding on the reasoning in Harwood. In a careful judgment he held that:

the existence of a winding up petition is not an automatic defence to an application for summary judgment

a court will not consider whether a claimant is ‘actually insolvent’ on a summary judgment application

issues of insolvency are properly considered on a cross-application for a stay of enforcement under the checks and balances of the test set out by Coulson J in Wimbledon Construction Co 2000 Ltd v Derek Vago[2005] BLR 374

The decision on this issue is to be welcomed. Had the court held otherwise it would have introduced a further element of uncertainty into the adjudication regime. Were the existence of a winding up petition an automatic defence to an application for summary judgment it would provide a new tactical route for defendants resisting payment. If the petition allowed defendants to invite the court to consider ‘actual solvency’ it would undermine the balance achieved in the Vago test increasing cost and uncertainty.

The case however highlights a difficulty that arguably insolvent companies seeking to enforce an adjudicator’s decision will face under the Vago test. A&L contended that it had ceased trading due to the financial impact of Coveside’s failure to pay sums due. However the adjudication was only in respect of some of those non-payments. The disputes as to the other non-payments remained to be determined. Some of these disputes were in respect of vastly greater amounts. A&L was therefore unable to satisfy Coulson J that its financial predicament was caused wholly or in significant part by the non-payment of monies which were the subject of the adjudicator’s decision. Coulson J held that this was vital (following his own decision in Pilon Ltd v Breyer Group PLC[2010] BLR 452) and granted a stay. In the present case Coulson J held that the evidence did not clearly establish that the financial difficulties were solely due to this contract. What if they were? Unless all the claims for non-payment had been the subject of the adjudicator’s decision the answer would have been the same: the insolvency could not be proved to be caused wholly or in significant part by non-payment of the claims adjudicated upon. The decision highlights serious practical difficulties for companies alleging a number of non-payments or breaches. What can a company in that situation do? It may not be able to include all claims within one adjudication: not all may be considered part of one dispute. Will it have to choose which dispute to adjudicate first depending on its value? Can it in any event safely commence a series of adjudications as the response to seeking enforcement of each decision would be that the financial position has not been caused by that breach alone. Will a company raising one claim for non-payment find itself faced with multiple tactical disputes in order to prevent any decision in respect of one being enforced? It is an issue that will clearly need to be revisited by the court if the adjudication regime is to provide claiming parties with the cash flow that they need.

Isabel Hitching appeared as counsel for A&L, instructed by Else Solicitors LLP.